Look into the crystal ball

Research and development seen as crucial element to guide businesses into the next century

Until the mid-1970s, the Louisville Slugger represented the leading edge in baseball-bat technology. Sluggers were used then, as today, by nearly all major leaguers, and the bat had assured a measure of fame and fortune for Hillerich & Bradsby Co., a Louisville firm founded in 1884.

Then came the advent of the aluminum bat. Much to the surprise of many observers, it caught on. Even the experts at Hillerich & Bradsby, steeped in the rich tradition of an all-natural wood product, were forced to alter their views.

“When aluminum came in, we were one of the last companies to get into it,” recalled Bill Williams, vice president of advertising and public relations for Hillerich & Bradsby. “Quite honestly, we were dragged kicking and screaming into the aluminum-bat business. Consequently, we were followers, and we found out very quickly that even with the wonderful name recognition of the Louisville Slugger, that brand loyalty does not necessarily translate to a different product.”

Then ensued a classic example of what a concentrated research and development effort can do for a firm, even one forced to play catch-up with the new kid in the batting box.

“We had to spend a lot of time, a lot of money and a lot of effort to play catch-up,” said George Manning, vice president of technical services for Hillerich & Bradsby.

The popularity of aluminum bats dropped the company’s output of wooden bats from 6 million a year to only 900,000 a year at one point, said Williams.

“From 1974 to about four or five years ago, there was a lot of frustration for us,” he added. “Mr. Hillerich, our president, got personally involved in it. About five or six years ago, he said ‘Look, we’re going to start talking to some of these top-of-the-line softball players, and we’re going to ask them what they like. We’re going to quit sitting here in Louisville deciding what everybody likes. We’re going to find out, just like we have for so many years in good softball bats.'”

So the firm started working with softball teams–aluminum bats may not be used in the major leagues, but are favorites with softball teams–testing equipment on the field and in its own research facility in Mount Pleasant, Texas.

“They’d come back and say, ‘This bat is not worth a darn,’ and we’d start again, and it all paid off,” said Williams.

The TPS line of aluminum bats that the firm developed about three years ago has produced “the best-selling softball bat in the world, and now we’re introducing a graphite bat that we think is going to be successful,” he said.

The newest bat developed by the company is “made of carbon and glass fibers,” said Manning. “It is a performance bat unlike some of the competitive composite bats that have been on the market–it equals the performance of the top-grade aluminum bats.”

The carbon-and-glass bat took about three years to develop and was introduced in February. Despite the hefty price tag, $150 vs. $110 to $120 for an aluminum bat, the composite already has drawn orders from “all across the world,” said Manning.

The firm’s overall sales for the latest fiscal year, which ended in June 1991, were about $90 million, said Williams, adding that the figure represented “the most profitable year in our history and the best sales year in our history.” This year the firm will make about 1.4 million wood bats, and “probably for the first time,” more than 1 million aluminum bats.

“Last year was a record year, and this year we’re already ahead of last year,” Williams added.

The company’s success isn’t due solely to the turnaround in the baseball-bat market, however. Williams said R&D was perhaps even more important in another of the company’s product lines–golf clubs.

Hillerich & Bradsby also makes hockey sticks, sells baseball and softball gloves–which are designed by the company but manufactured elsewhere–and has a timber division. Williams said last year was “outstanding” for those divisions as well.

Although the privately owned firm will not release figures on dollars spent for R&D, it is “an extremely important part” of the manufacturing process, Manning said.

“The name of the game in this business is product performance,” Williams added.

“In general, the companies that continue to be successful in the United States are the ones that have continued to put a significant portion of emphasis on research and development,” said Dr. Thomas Hanley, dean of the J.B. Speed Scientific School at the University of Louisville. “If you find a company that isn’t doing this, you’ll find a company that’s trying to live on yesterday’s technology. And eventually, they’re going to get caught.”

Executives of local companies agree.

“We’re in a very competitive industry, and we must stay abreast of the industry,” said Lawrence E. O’Connell, chairman and chief executive officer of Bunton Co., a Louisville-based manufacturer of heavy-duty lawn- and turf-care equipment.

While he would not release sales and budget figures, the company traditionally has allocated about 10 percent of its total payroll to R&D, O’Connell said.

“We’ve brought out a great deal of new products on a rather timely basis over the last year and a half, and a lot of what we’ve done has been for our turf equipment and golf line,” he said. “That’s the area that we feel we’re going to enjoy the most growth in.”

The backbone of his business is the rotary line of commercial mowers, O’Connell said. “And we’ve expanded the rotary line” with a new hydraulically powered mower, which enhances maneuverability, as well as other products, he added.

R&D is “absolutely critical” to his firm “because it helps you focus on what products you should have in the line, and that’s very important. You can have a large product line and have a lot of inventory because you don’t sell it. If you’re exercising the proper research and development concepts, you will have products that are constantly improving and changing to meet the needs of the market.”

Bunton has an R&D prototype shop and test facility, he said. Use of sophisticated, computer-assisted equipment at the facility enables the company to move “rather quickly to the manufacturing process,” O’Connell said.

In general, most sources interviewed agreed that the more competitive the business, the more the need for R&D.

“The markets we serve are very competitive,” said Ronald Schneider, director of corporate manufacturing services for Thomas Industries Inc. The Louisville-based company specializes in lighting and compressors.

“As diverse as we are, with operations around the country and the world, normally the plants have their own research and development efforts,” he said. “At the corporate level, we support those efforts, particularly in electronics.”

According to the company’s preliminary annual report for 1991, Thomas Industries spent $12.1 million for R&D last year, up from $11.1 million in 1990. Meanwhile, total sales for 1991 were $408.3 million, down from $461.7 million in 1990.

“We try to have a staff that is dedicated to product research and that calls on outside sources when the need arises,” said Schneider. “We do that in lighting also. We have an outside electronic technology company that’s working with our R&D group to complement them on specific projects.”

Many advances have resulted from R&D efforts, he said. “We introduced the electronic ballast, an energy-saving device for fluorescent lighting that was developed by our R&D group.”

In the compressor field, a number of developments also have been linked to research efforts, including the use of plastic components. “That has given us a leading edge in that field,” Schneider said.

One recently introduced product is a recessed light. The product represents the “first in the industry” with a plastic housing, Schneider said. “I won’t say that’s revolutionary, but it’s certainly going to put us in the lead in that area.”

Schneider pointed out that most people think about very high-tech industries, such as NASA-related projects, when R&D is discussed.

In reality, he said, “research and development at all levels of technology, regardless of the project, is important to keep a company in the front.”

Environmental issues also affect efforts at Thomas Industries. For instance, the new concentration in lighting is “energy reduction,” Schneider said.

A system developed by Thomas uses sensors to turn lights off and on in a warehouse “depending on the presence of people” or heavy equipment, such as forklift trucks. “This is for commercial lighting,” Schneider said. “It really just dims it to about 40 or 50 percent of its power, because if you were to shut it off it takes 10 to 15 minutes to come back up.”

Just as Thomas Industries uses outside resources, so do many other area firms. “Most of the interactions I have with industry are in developing collaborative programs between the university and industry for research,” said Hanley of Speed School.

“Our costs are probably as low as you can come by in generating research.” But, he said, the expertise offered in a university setting would be hard to duplicate elsewhere. “We possess expertise that they can’t get at the price we offer,” he said, noting the availability of highly sophisticated equipment and highly educated staff.

“What we’re trying to do here at the university is to try to set up collaborative research agreements in a variety of areas,” he added. “We’re trying to put together agreements where we can use other people’s equipment or they can use our equipment, and try to offer this service to the people in the area in an attempt to lower the cost of research and development.”

E.I. du Pont de Nemours & Co. and Rohm and Haas Co. are among the firms affiliated with the program, he said.

Large companies such as General Electric Co. enjoy the advantage of a wide array of in-house R&D. GE spent a record of $4.2 billion in R&D in 1990, a 9-percent increase from 1989’s $3.9 billion, according to its annual report. From 1986 to 1990, the expenditure fluctuated between a low of about 7 percent of sales and to just below 10 percent in 1990.

Such fluctuations, Hanley said, are found in virtually all companies. “Some companies have sporadic funding histories for R&D; they go up and down with the company’s business,” he said.

R&D spending is viewed as “an important ingredient” in business strategy for GE, said Bill Sheeran, vice president of technology at GE’s Louisville appliance manufacturing facility. Appliance manufacturing “is not a technology-driven business; it’s a market-driven business,” Sheeran said. One of the main applications of past R&D has involved the production of new materials.

Permatuf is one example, Sheeran said. “GE was the first on the market with a plastic dishwasher interior and that was a major product innovation” when it was introduced in the 1970s, he said.

The material eliminated “rusting problems” and was developed jointly by GE Appliance technologists and GE’s Corporate Research and Development Center.

Having access to the center, as well as to R&D efforts throughout the corporation, is an “important advantage,” Sheeran said.

More current R&D focuses on devising techniques for design that allow a drastic shrinkage of product-development cycles, Sheeran said. Speed “is absolutely critical,” he said. A “quick response” system already in place shortens the cycle of delivering products to the customer.

“Our adjunct to that is to develop our new products much faster; the reality of it is that the marketplace is demanding new features, new value in the product, so the pace of product development is something we want to pick up dramatically,” Sheeran said.

That involves new computer technology enabling “rapid prototyping techniques,” quick design and, in some cases, overnight production of new parts.

Environmental concerns are expected to continue to play a key role in R&D. “Our big challenge in terms of R&D now is the elimination of chlorofluorocarbons from our refrigeration products,” Sheeran said. “That’s important not only from the point of view of the environment, but it’s also critical because it’s required by the law.”

An additional issue is appliance disposal–brought to the fore by municipalities across the country. It means, said Sheeran, “we’ve got to design our appliances for recycling.”

R&D also is an important part of the corporate philosophies of both KFC Corp. and Brown & Williamson Tobacco Corp., representatives of those Louisville firms said.

Brown & Williamson “continues to make major investments in research and development,” said Roberta Ashe, a company spokeswoman, who declined to release any figures.

Richard Detwiler, KFC’s director of public affairs, said his firm is spending more on R&D each year, but also declined to release figures. Detwiler said KFC’s R&D efforts have produced everything from new food products, such as “hot wings,” to new packaging, such as the “go bucket.”

He added that “consumer demand for products is probably the biggest factor driving our research and development.”

Customer-driven markets in even high-tech industries could be the product of corporate values moving away from the richly innovative, competitive spirit of the past, said Beverly Tyler, assistant professor in the management department at Indiana University’s School of Business in Bloomington.

“The major change in the environment in the United States is that we’re definitely moving to a less competitive and more cooperative relationship–the realization that if we’re going to survive we’re going to have to work with our customers,” said Tyler.

She recently completed a doctoral dissertation on corporate investments in R&D. Her sample included 1,159 firms of all sizes that have invested in research and development from 1986-1989. She did a statistical analysis of 303 questionnaires returned to her out of some 1,100 she sent to chief executive officers selected from the sample. She also selected a group of 16 chief executives to interview in depth.

From her research, she concluded that spending on R&D usually was consistent within a company from year to year. Most of the costs, she found, were for salaries, a “more or less fixed expense.” From 6 percent to 10 percent of sales generally were invested in R&D.

Those figures, however, were reported by the small, entrepreneurial companies whose chief executives she interviewed. Such companies, she pointed out, “have to invest in R&D or they don’t survive.”

Larger companies may spend less as a percentage of sales. The statistical abstract of the United States for 1990, a Bureau of the Census publication, indicates far smaller percentages.

In 1970, for instance, an average 3.7 percent of net sales was invested in R&D by U.S. manufacturing companies. By 1986, the latest year for which figures are available, the percentage had increased to 4.7.

In dollar figures, total R&D increased from $26.1 billion in 1970 to $126.1 billion in 1988, the latest year for which figures are available.

Tyler found the “mindset” of the chief executive to be another key factor in predicting the amount of money devoted to R&D. Over time, she said, many chief executives eventually arrive at what they consider an appropriate amount.

Sales also are important in relation to the amount of R&D money, as well as a company’s diversification. “The larger the company, the more they can invest in research and development,” Tyler said.

“The issue in most of the small companies (whose chief executives) I interviewed was that they would invest more in R&D if they had it, but they just don’t have the cash for it.”

The high cost of capital in the United States also hinders R&D, Tyler said. She noted that West Germany and Japan are among countries that typically invest more in R&D.

According to the statistical abstract, the United States invested 2.7 percent of its gross national product in R&D in 1986; Japan invested 2.8 percent and Germany invested 2.7 percent.

Those figures reflect all R&D spending, however, which includes defense-related projects. When looking at non-defense-related R&D expenditures for the same period, the United States invested 1.8 percent, Japan 2.8 percent and West Germany 2.6 percent.

The United States is falling behind in spending on research as spending abroad increases, according to a report released in February by the National Science Board. The report indicates that spending on research in the United States peaked in 1989 at $154.31 billion. In 1990, the amount fell to $151.57 billion. (Figures are in constant 1991 dollars to eliminate the effects of inflation.)

And while some analysts quoted in a recent New York Times article believe the United States still leads in research spending by business, other analysts interviewed by the paper in a later article believe that Japan has equaled or surpassed the United States as the world’s top patron of industrial R&D.

In both West Germany and Japan, the costs of capital traditionally have been lower than in the United States, Tyler said. “It’s not that we lack the desire, it’s that it costs so much to get the money.”

Because of what she perceives as the lack of money for R&D, Tyler predicts that American businesses will move toward the same spirit of cooperation prevalent in Japan.

“I definitely think there’s a major shift away from the competitive and toward the cooperative,” Tyler said. “But I’m not seeing that shift in the government, and I’m not seeing that shift in workers.”

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